Sunday, September 25, 2016

Why credit card interest rates are high

If the Reserve Bank's official cash rate is 1.5 per cent and home loans are 4.4 per cent, why are credit card rates as high as 20 per cent?

It was the question that had the new Reserve Bank governor Philip Lowe stumped.

On Thursday he confessed before the Parliament's economics committee: "I wish I knew the answer to that".

"If you ask the same questions in your subsequent hearings, I will be interested in the answers," he added. His usual reply would have been that given time competition will sort it out. But it doesn't, for credit cards.

The Reserve Bank's own figures show that 20 years ago the average rate on a standard credit card was 16.8 per cent. Ten years on, it was 17.3 per cent. Today it's 19.75 per cent. It's gone up, in the same period in which the standard home loan rate has fallen from 9 to 8 to 5.25 per cent, and the discount rate to 4.4 per cent. The cash rate has slid from 7 to 6 to 1.5 per cent.

The banks will say in their defence that they also offer low-rate cards for which they charge a fee, but the rates on those cards have also gone up. Ten years ago the average low-rate card charged 10.8 per cent. Now it's 12.7 per cent.

Lowe's best guess is that banks choose not to compete on rates, believing they didn't need to. "Consumers, for whatever reason, when selecting a credit card, are not particularly sensitive to the interest rate," he said. "They often want to get a one-year interest-free period, they are quite sensitive to that, they are quite sensitive to reward points."

He's right about not being sensitive to rates. I don't have a clue what mine is. But I've signed for cards that offer points (before abandoning the idea because I thought it was silly) and I once signed up for a card because it had a really neat design. When a US bank renamed one of its cards the "Elvis card" a few decades back its takeup rate tripled.

The best guess as to why most of us don't much care about rates comes from studies that find that alongside the sizeable proportion of the population that pays off its cards on time (and so doesn't care about rates) is a larger group of "deluded optimists" who believe they will pay their cards off on time. They're not concerned about rates either because they falsely believe they won't have to pay them. Psychological tests show the more likely people are to select cards with high rates, the more optimistic they are about all things.

Which just leaves the realistic pessimists, who know they'll have trouble and are right. The banks don't much want them; there's a genuine chance they won't get paid. So they screen them out by charging higher rates than their competitors, which leads to a sort-of race to the top, which is what we've had. Now what we need is a way out.

In The Age and Sydney Morning Herald

Friday, September 23, 2016

Blame all around as the ABS spreads responsibility for census

The Australian Bureau of Statistics has blamed the media for the failure of its census hotline and blamed an overseas denial-of-service attack for the failure of its census website.

In a strongly worded submission to a Senate inquiry, the Bureau also attempts to deflect blame for the overwhelming of its website on to its contractor, IBM.

The submission says from early on, both its call centre and its automated paper-form request service received far more calls than expected, forcing it to implement a "call blocking" where calls were answered and callers asked to call back later.

It blames "unexpected and unprompted media and social media focus on potential of census fines", for which it hadn't planned because its usual strategy is not to mention fines before the census night. Also Australia Post delivered letters informing people of the hotline more quickly than it expected and its census advertising campaign was more effective than it expected.

In media reporting about its decision to retain names submitted with the census to enable linking to other datasets, the ABS was "rarely approached for its perspective". It met with the Australian Privacy Foundation to explain its position but the Privacy Foundation "continued to reflect their views irrespective of ABS explanations".

Before the denial-of-service attacks, which caused it to shut down the website on census night, its contractor, IBM, had provided "reasonable assurances" that adequate protections were in place.

"At no time was the ABS offered or advised of additional protections that could be put into place. Additionally, no suggestion was made to the ABS that the protections that were planned were inadequate," the submission says.

After the first denial-of-service attack at 10.10am on census day, the ABS asked IBM to invoke "Island Australia", where the website was cut off from other countries.

By the fourth, at 7.28pm, the ABS and IBM observed "an unusual spike in outbound traffic". The ABS instructed IBM to prevent the Australian public from commencing new census forms to ensure the census data was protected.

It was unable to shut down web advertising asking people to file online or automated Twitter responses telling people to keep trying for some time.

As of September 20, 94.4 per cent of households had completed their census return, in line with expectations. Fifty-nine per cent had completed their forms online, less than expected.

By September 20, 6743 people had refused. During the previous, 2011, census 13,194 people refused.

In The Age and Sydney Morning Herald

Thursday, September 22, 2016

Help me out, run up more debt, says Reserve Bank boss

Incoming Reserve Bank chief Philip Lowe has appealed to the Turnbull government to help him out with economic management by borrowing big for infrastructure, saying there's only so much that further cuts in interest rates can do.

In what amounted to a plea to the Prime Minister and Treasurer to take advantage of near-record low interest rates and borrow now that the Reserve Bank's cash rate was close to zero at 1.5 per cent, he told a parliamentary hearing that monetary policy is "not working as effectively as it might have".

"One response is to keep doing more of it in the hope that it finally works, he said. "My judgment is that that has not been particularly useful.

"Another option is for some entity in the economy to use the low interest rates to increase its spending. The government could either use its balance sheet or its planning capacity to do infrastructure spending."

Asked whether the ratings agencies would strip Australia of its AAA credit rating if it ran up more debt, Dr Lowe said it would be important to use the funds for investment rather than recurrent spending.

"If we keep on borrowing to fund recurrent expenditure, it's going to have to be paid by our children and we start to lose our insurance against something going wrong," he said. "But that does not mean that we cannot borrow to build assets.

"That is what most businesses do; they meet their ongoing costs through their revenue flow and they borrow to build assets. So the test is: can the government, can any of us find assets to build that generate a return for society? If you can do that in a structured, disciplined, rigorous process with good governance, I am hopeful you could have a conversation with the rating agencies about that - whether you could convince them, I do not know."

He said even if the ratings agencies did withdraw Australia's AAA rating, the impact on the cost of borrowing would not be "overly material". When Britain was downgraded in June its borrowing costs actually fell, because other things were happening at the same time.

Asked whether there was a limit to how much the Turnbull government should borrow, he said the limit was finding worthwhile projects.

"Two weeks ago, the Australian government could borrow at the lowest rate since Federation," he said. "If we can develop strong business cases, just as a private business does, we can find the money."

Dr Lowe rejected the contention that the Reserve Bank's two interest rate cuts this year had sparked a new round of house price rises.

"In fact, house price growth has slowed over the course of the year, and I think that is good," he said. "As the father of three children, I do worry that people are paying so much for their housing. The solution to that, and I am going to sound like a broken record here, is housing supply and investment in transportation infrastructure."

Although Australia's terms of trade appeared to have stopped falling, from here on living standards would grow more slowly.

"From the early 1990s up to 2006 or 2007, we had annual growth in real per capita income of almost 3 per cent a year. No other Western country has had anything like that. We are not going to go back to that, but we can go back to having very respectable growth. We are going need a laser-like focus on lifting productivity growth."

Asked whether the big four banks were right to refuse to pass on all of the Reserve Bank's August interest rate cut, Dr Lowe said they had prioritised their shareholders over their borrowers in order to maintain their return on equity. Over time it would slip as new competitors ate away at their business models. "Inevitably competition comes from the new entrants," he said. "It is not likely that all of a sudden existing incumbents will decide to compete a whole lot more aggressively."

Ahead of the parliamentary committee's grilling of bank executives due next month, Dr Lowe said he wanted banking to return to be seen as "profession of stewardship, not marketing or product-distribution."

"I do not know how to embed within a commercial bank the idea that trust is the foundation of the noble profession that we do," he said. "I wish you good luck as you pursue the issues."

In The Age and Sydney Morning Herald

First impressions count, and at his first public outing as the Reserve Bank governor, Philip Lowe was determined not to waste his.

His suggestion that the Turnbull government borrow big to invest in infrastructure is far from off the cuff. It's been raised a number of times by his predecessor Glenn Stevens, and on Wednesday this week by the OECD. But the interest rates that he has inherited make it urgent. A cash rate of 1.5 per cent leaves little room for further cuts without hitting zero and then going negative.

"There are," he said "better ways to stimulate the economy than interest rates of zero."

The better ways require Malcolm Turnbull to take the Reserve Bank's place by borrowing to pay for worthwhile investments, getting the bonus of a more productive economy down the track if the investments are well chosen.

To make sure the government realises how serious he is, Lowe busted the myth that it would have much to fear if it lost its AAA credit rating.

The effect would not be "overly material". Concern about the ratings agencies was politically useful so long as it was used as a firm guide for policy.

"To my mind, this focus on the credit ratings agency serves as a useful reminder that we need to make sure the recurrent budget is on a good path. That is how we should be thinking about this," he said. But the cost of borrowing was extraordinarily low and would remain so even if Australia lost the AAA rating. Any project with a social return over 2 per cent per year was worthwhile.

His other key message was that the economy might be about to turn. Mining investment might not have too much further to fall and commodity prices seem to have bottomed out and picked up. So there's a chance he might not need to cut rates again: a 50-50 chance, according to market pricing, which he quoted as a sort of a guide.

After years of apprenticeship as deputy governor, Lowe handled the politicians with ease. He is hoping that if he needs them they can help him out.

In The Age and Sydney Morning Herald

The true cost of our insanely low Newstart allowance

You'd be forgiven for thinking that money matters to everyone except those who don't have it.

Last week, after months of anguish, the government gave ground on its plan to to wind back the super tax concessions directed to the wealthiest 4 per cent of the population. It didn't want them to suffer too much.

This week, at the National Press Club, Social Services Minister Christian Porter dismissed suggestions that it needed to lift the Newstart unemployment benefit of just $264.35 per week.

"The fact that people who find it challenging to subsist on Newstart do so for short periods of time might actually speak to the fact that that's one of the design points of the system," he said. The low rate was "working okay because the encouragement is there to move off those payments quickly".

As it happens, there's nothing "designed" about the rate of $264.35 per week. If there was, it would stay constant relative to other payments instead of drifting lower. A decade ago Newstart was 20 per cent of full-time average earnings. This week, it'll be just 17 per cent; and that's after Thursday's increase. Newstart climbs each March and September in line with a more miserly formula than the pension and most rates of pay. This week's increase is just 55¢ per week. That's right: 55¢, taking the weekly rate from $263.80 to $264.35.

By contrast $271 is the minimum amount per night Porter has charged, on top of his wage, for travelling away from home according to the most recent set of records. At times he has charged up to $438 per night. Living is expensive.

For almost everyone, it's more expensive than $264.35 per week, which is why, on request, Centrelink will dole out the allowance weekly rather than fortnightly. There are people who can't wait.

Even those who can wait suffer, in ways that are more serious than generally imagined.

The latest set of Boyer Lectures on ABC radio are eye-opening. Michael Marmot, an Australian who lives in London, is perhaps the world's leading expert on what kills us: not just the immediate things such as cancer and heart disease, but the mental and physical conditions that bring them about.

"How can an older person lead a life of dignity, take their place in public without shame, if they cannot buy presents for their grandchildren?" Marmot asks. How can families with children live without stress if they can't buy them new clothes or entertain their friends?

In the Whitehall study, his most famous, Marmot examined the lives and deaths of 17,530 British civil servants. There is nothing particularly remarkable about civil servants, he explains in his lectures. They are "neither the richest nor the poorest in society".

Yet those public servants on the lowest rate of pay, with the least control over how they spent their days, were extraordinarily more likely to die in any given year than those at the top. Even when he controlled for risk factors (comparing non-smokers to non-smokers and so on), those at the bottom were twice as likely to die as those at the top.

Even those on step 2, just one rung below the top, were far more likely to die of all causes than those at the very top. His explanation is stress. Hormones such as cortisol can kill, through all sorts of mechanisms. People who don't know how they will make it through the week are loaded with them.

In their new book Scarcity: why having too little means so much, economist Sendhil Mullainathan and psychologist Eldar Shafir describe what they call "bandwidth tax". Many of us can easily cope with unexpected calls on our finances such as traffic fines or emergency visits to the dentist.

But if we are short of money our stress system kicks in. Worrying consumes our mental bandwidth as well as poisoning us. At an American mall, they asked high income and low income shoppers how they would cope if their car suddenly needed a $3000 service. The low income shoppers performed incredibly badly on a series of intelligence tests administered immediately afterwards; much worse – an incredible 13 IQ points worse – than low income shoppers who hadn't been asked to think about the $3000 service. The high income shoppers performed no worse.

Thirteen points is the difference between "superior" and average intelligence, it's the difference between average intelligence and "borderline deficient". It could be the reason why people stressed by trying to live on $264 per week (plus whatever they can scrounge) do so poorly at job interviews.

Porter wants to get people off welfare, which is fine. But getting them out of anguish-inducing poverty is important regardless. Instead he revealed at the press club that the Turnbull government plans to press ahead with the Abbott government's decision to extend the waiting period for Newstart from one to four weeks. It would be better off dropping the measure (which was never likely to get through the Senate) as a gesture of goodwill. Unemployed Australians might even believe the Coalition can imagine how they feel.

In The Age and Sydney Morning Herald

Tuesday, September 20, 2016

National default super could save $1.5 billion

The Turnbull government is considering a radical shake-up of Australia's superannuation system that would pit banks and industry funds against each other for the right to manage the deposits of every new entrant for at least two years.

The shift, detailed in an issues paper released by the Productivity Commission on Tuesday, would centralise the decision about which default fund new employees were placed into, taking it out of the hands of employers and making it the result of a national tender.

Calculations by the Grattan Institute suggest it could slice $1.5 billion per year from the fees charged by default funds and put downward pressure on the fees charged by other funds.

Treasurer Scott Morrison has asked the Commission to examine the idea of a formal competitive process, commended by the Murray financial system inquiry as likely to reduce the costs for funds and compliance costs for employers.

In Chile, which has had the scheme since 2010, the firm that won the first national tender charged fees 20 per cent lower than the previous average. The firm that won the second tender, in 2012, charged fees 43 per cent lower. The firm that won the third, in 2014, charged fees 65 per cent lower.

The Commission says existing default fund members would not be required to switch, but would have to be offered the same low fees as new default fund members if they chose to switch.

It says one model would be for the government to choose a single default fund for all new employees for two years, another would be for it to choose more than one fund and assign employees either randomly or on the basis of characteristics such as age.

Grattan Institute productivity growth program director Jim Minifie said his work suggested a national tender could eventually wipe $750 million off administration fees and up to another $800 million off management fees.

Big corporations already run tenders for default funds and get much better fees.

"Let me give you an example. One of the big mining companies put out for tender a very significant amount of employee super, and a retail fund won that it for an investment fee of 0.45 percentage points. That was well below the 0.61 points it charged on the retail market for an identical investment product."

A spokeswoman of the Association of Superannuation Funds said it was considering the issues paper and would be making a submission to the inquiry. David Whiteley, chief executive of Industry Super Australia was opposed to the change, saying it was "hard to justify redesigning a system that has not as yet been given the opportunity to operate".

The Fair Work Commission had been tasked with selecting shortlists of funds from which employers under each award could choose but had not begun the task because Government had not reappointed the required expert panel.

The Commission's paper says the simplest way of constructing a tender would be to conduct a reverse auction awarding the work to the firm offering to charge the lowest fee, as happens in Chile. However, that carried with it the risks that funds would offer "overly conservative investment strategies and poor-quality services in order to lower costs".

These could be overcome by stipulating asset allocation ranges or requiring that funds disclose their true costs as a condition of participating in the tender.

Dr Minifie said a refinement might be to publish the performance of each member's fund on their e-tax form alongside the performance of the winning default funds, inviting them to tick a box in order to switch.

In The Age and Sydney Morning Herald

Saturday, September 17, 2016

Meet Debelle and Lowe, the odd couple in charge of the RBA

On Friday nights in the late 1980s around 11 a long-haired Treasury official used to slip into the chair at what was possibly the grottiest collection of radio studios ever attached to a university campus.

2XX was built on the edge of an indoor basketball court at the unfashionable northern end of Canberra's Australian National University. The brown carpets were mouldy and coffee-stained, the programming resources were vinyl albums in blue milk crates. When it wasn't putting to air foreign language programs, it broadcast talks about Palestine, land rights and trade unions. It was known around town as the "communist radio station", except for when it played music.

In an unusually deep and resonant voice, Guy Debelle would introduce "Velvet Nights", a 90-minute homage to the Lou Reed-fronted band Velvet Underground, leavened with so-called "greasy pop" from Adelaide bands including the Spikes, Exploding White Mice and Mad Turks from Istanbul.

By day a foreign debt specialist in the federal Treasury, at night he would relive his university years in Adelaide rocking to music at the Thebarton Town Hall, the Tivoli Hotel and the Adelaide University Bar where he once lost his voice screaming as Midnight Oil played to an audience of just 100.

He wrote his thesis (on labour economics) to repeated playings of the 11-minute cataclysmic epic The End by the Doors. A science and maths student at school, he might not have studied economics at all were it not for the intervention of a family friend, Richard Blandy, an economics professor who acted as a mentor to him after his mother died of breast cancer when he was 17.

"He was casting around," Blandy tells BusinessDay. "I thought he would do very, very well in economics." His father, lawyer Bruce Debelle, who later became a Supreme Court judge and conducted a royal commission on sex abuse in South Australian schools, suggested law. Debelle told him he would prefer to have weekends.


Half a continent away and a few years earlier, a small boy with brilliant red hair, the oldest in a family of five, was blitzing two high schools in the NSW regional hub of Wagga Wagga. Philip Lowe was dux of St Michael's Regional High School, which went up to year 10, then dux of Trinity Senior High School in year 12. "He was very popular, the brainiest kid in the school – he stood out because of his red hair, if ever there was an award for maths or science he would win it," says Michael McCormack who followed him at both schools and later went on to edit The Wagga Daily Advertiser.

On graduation day his economics teacher wrote a citation. Lowe would one day be teaching his "latest brilliant theories" which would have "solved the international economic crisis".


There was more to Debelle than music. He was an extremely fast runner over 800 metres, an impressive AFL player, a swimmer and a distance cyclist. The holder of a first-class honours degree, he left the Treasury to briefly work at the Reserve Bank in Sydney before taking leave to study for a PhD at the Massachusetts Institute of Technology, inadvertently joining what would come to be known as the "MIT crew" who run the Reserve Bank of Australia. The bank's three top economists; Debelle, Lowe and Christopher Kent, who heads the economic division, obtained their PhDs at MIT. It's known for open inquiry, for taking nothing for granted, and for robust exchange of ideas.

By day Debelle worked on his thesis on inflation targeting under Stanley Fischer who later successfully steered the Bank of Israel through the global financial crisis and is now the vice-chair of the US Fed. At night in the seedier parts of Boston he checked out legendary local bands the Pixies (among his all-time favourites), Dinosaur Jr> and Buffalo Tom. He was later invited back to the MIT to lecture, and could have stayed, in such high regard was he held.


Lowe joined the Reserve Bank as a clerical assistant, moving to Martin Place in Sydney while a teenager straight out of high school. The RBA had found it hard to snare good talent so it hired promising school students early on bursaries and gave them menial work to do by day while they studied at university at night. His thesis supervisor, John Hewson, who later became opposition leader, describes him as shy and quiet, yet "confident in his own ability".

"He is not the sort of person who is going to make claims or put arguments that he doesn't actually personally believe," Hewson says. "He doesn't need to fall into line."

Lowe got a first-class honours degree and won the University Medal.

The term "moral compass" comes up repeatedly in interviews with contemporaries about Lowe, most of whom don't want even the details quoted. People go out of their way to point out that, even away from work, Lowe knows the difference between right and wrong and is prepared to stand up for it. He married a Reserve Bank colleague Jocelyn Parker, who now works at the Australian Prudential Regulation Authority.


Back at the RBA after a year at the Bank for International Settlements in Switzerland, Debelle gained a reputation for being blunt. While the divisions he ran were among the happiest, he had no compunction about telling people they were wrong.

Paul Bloxham, now with HSBC Australia, explains it this way:

"It comes down to the fact that he has already thought through a lot of the issues. What he is looking for is that next edge that someone might give him. His way of debating things is to have quite strong views, hold them, and let you convince him."

A different financial markets economist who has attended the quarterly lunches the RBA holds for fund managers, says that unlike Lowe, Debelle "doesn't hold back".

"Whereas Phil probably wouldn't even break a stride, if somebody wants to push a point that Guy thinks is wrong, he leaves the whole room in no doubt about what he thinks about that particular point of view."

Debelle found himself running the RBA's financial markets division during the 2008 global financial crisis as financial markets seized up. For a short time when it was literally impossible for foreigners to buy or sell certain Australian dollar assets. He would do enormous deals with other central banks to prise the markets back open, often juggling two phones at once, working from home through the night, and then driving in to Martin Place to use secure lines.

On the morning of October 8, in the aftermath of the collapse of Lehman Brothers, Governor Glenn Stevens prepared advice that would have seen the board cut its cash rate by double the usual amount: 0.50 points. He sought out Debelle who advised him to double it again. Rates should be cut by 1.00 points, the most since the early 1990s recession. They watched trading screens with relief as financial markets took the move as a sign the RBA was in control rather than panicking. The next month they cut again by 0.75 points and then by another 1.00, and then another 1.00. Debelle, as well as Lowe, who had approved of the cuts as head of economic research, had been right. Australia escaped a recession.


Treasurer Wayne Swan made Lowe deputy governor (one rung away from governor ) in 2012 after interviewing other internal candidates who probably included Debelle. He says Lowe is guarded, although with an inquiring mind, whereas Debelle is prepared to call a "spade a spade".

As deputy, Lowe has run much of the RBA. An insider says the deputy does the jobs the governor doesn't have time to, including managing staff.

"During his deputy governorship Lowe has taken ownership of all the tedious issues and got into the nitty gritty with staff and lived and breathed it," the insider says. "Everyone is amazed at his exceptional competence and his easygoing manner in pushing things through."

At times known as "Tintin" because of his red hair (now somewhat faded) and neat appearance, as governor from next week Lowe is likely to keep running the RBA as he has.

Bloxham says people who've read his speeches and characterise him as a hawk on monetary policy (not wanting low rates) misunderstand the transformation that takes place as a manager ascends to the top.

"It happens in all institutions, not just the Bank; you can afford to take stronger views, in one direction or the other, when you're not the final decision maker. Once you are the person who is making the call on what the recommendation should be, I think your approach gradually changes."

He says it will also happen with Debelle in his new position as Lowe's deputy.


There's thinking within the RBA that Debelle could succeed Lowe, even though Debelle, who turns 50 this month, is only a few years younger.

"The head of the US Fed, Janet Yellen, was around 70 when Obama appointed her," the source says. "Guy would be only 57 if he was to be appointed after Phil finished his seven-year term. That still leaves room for a seven-year governorship before he is 65."

And room for music. While also drawing up new rules for the financial system as head of a Bank for International Settlements committee, Debelle has managed to work punk rock references into his speeches. One concerned the 1978 Saints number: Know Your Product. The lyrics read: "Cheap advertising, you're lying, never going to give me what I want". In his role as head of the financial markets division he's had a lot to do with banks. The other was the Doors' Roadhouse Blues. The lyrics read: The future's uncertain and the end is always near." Debelle was describing forecasting. 

He plays rhythm guitar in the RBA's in-house band which he says performs only two types of numbers: "punk, and post-punk".

A recent set, attended by staff including governor Glenn Stevens, included numbers by the the Sex Pistols, the Ramones and the Clash.


Lowe also knows his music. These days McCormack is a government minister. Last year as parliamentary secretary to the finance minister he had to represent Australia at a G20 meeting in Istanbul. Lowe attended in place of Stephens. At the conclusion, for the benefit of the Australian delegation, they broke into song: the school song of St Michael's of Wagga Wagga.

It begins: "The Murrumbidgee's winding waters light the lives of Wagga's sturdy breed, like hope eternal, its waters bright flow on as our undying creed." McCormack says Lowe knew every line.

In The Age and Sydney Morning Herald

Friday, September 16, 2016

Never retrospective, the super changes are a win for Turnbull

Limiting the amount anyone could contribute out of their own money into tax-advantaged super on top of employer contributions was never retrospective, but those who thought it was can relax.

The government is imposing a limit by another means.

The plan was to impose a lifetime limit of $500,000 - a figure so large as to be of use to less than 1 per cent of the population. How many of us know someone who can afford to pay money into super over and above their employer contribution and has half a million to spare?

It was said to be retrospective by many on the Prime Minister's own side because high earners might have planned for something else. Which makes it about as retrospective as a tax cut, or a price rise: it applies to future actions, but someone might have planned for something else.

The replacement regime will be just as (non) retrospective, but it'll be harder to paint as retrospective. Anyone who wants to put extra into super from their own funds will be able to do it up to $100,000 per year, down from $180,000 per year. Because only the size of the limit has been changed rather than its form, it'll be harder to claim that the nature of it has changed.

Of course, not many of us have a spare $100,000 to put into super over and above our employer's contribution, so for almost all of us, there will effectively be no limit.

Even if we came into a windfall and wanted to put it into super, the rules will allow us to use three years' worth of the limit at once, as they do now.

To pay for the extra generosity to Australia's richest, the government will delay for one year until 2018 a change that will allow people who have gone a year or so without making contributions to "catch up" by having their employer take out extra to compensate when they are back at work.

It will also shelve a plan that would have made it easier for Australians aged 65 to 74 to make extra contributions even though they are not working, something most wouldn't have been able to take advantage of in any event. It's hard to make extra contributions when you're not working.

Malcolm Turnbull and Scott Morrison are set to achieve what they wanted. All up, the package will save what it would have before: $6 billion over four years, with the key features still in place. There will still be a limit of $1.6 million on what you can put into super to earn income tax-free in retirement, the amount you can put in per year will fall from $30,000 ($35,000 for ages 50 and over) to $25,000, and very high earners on more than $250,000 will pay 30 per cent tax on their contributions instead of 15 per cent.

Labor supported the package apart from the question mark over retrospectivity and will feel duty-bound to support this. Turnbull and Morrison will have taken a small step towards making Australia's super system fairer, the biggest in its 25-year history.

In The Age and Sydney Morning Herald

Thursday, September 15, 2016

The real cost of offshore detention: $573,100 is just the start

What if our government really wanted to save money?

As well as going after $6.7 billion in its omnibus savings bill, it could go after the billions more it costs to run our immigration detention centres: $9.2 billion in the past three years, $3.9 billion to $5.5 billion in the next four, according to the most complete accounting yet of the costs normally hidden in inaccessible parts of the the budget.

It comes as an Audit Office report identifies the cost per offshore detainee: a gobsmacking $573,100 per year.

For that price – $1570 per day – we could put them up in a Hyatt and pay them the pension 15 times over.

It costs less than half that, $200,000 a year, to house a typical onshore prisoner; a mere fraction of that, $72,000 including super, to pay a typical full-time worker, and just $20,700 a year to pay a full pensioner.

Ninety-nine per cent of the population don't come anywhere near $573,100 a year in income or cost. The census stops asking when income sails past $156,000.

But the comparison with wages isn't strictly valid. It understates the outrageousness of the $573,100 price tag. The $573,100 isn't being paid in return for a detainee's labour, in return for a contribution to society, as are wages. It is being paid to prevent the detainee contributing to society. It is what economists call a deadweight loss. We get nothing in return for it, apart from less of what we could have had.

And perhaps because it is not meant to make economic sense (and perhaps because the Department of Immigration and Border Protection has operated as something of a law unto itself), it hasn't even made financial sense.

The Audit Office says the department breached public service guidelines by not conducting proper tenders for the contracts to provide services to Manus Island and Nauru, at times falsely claiming it faced urgent and unforeseen circumstances.

"The available record does not indicate that urgent or unforeseen circumstances existed," the Audit Office says. "The record suggests that the department first selected the provider and then commenced a process to determine the exact nature, scope and price of the services to be delivered."

The department's approach to selecting one provider to service both centres from 2014 "removed competition from the outset". There is no record of staff completing conflict-of-interest declarations, no record of the checks that would have discovered that a director of one of the subcontractors had faced bribery charges and was later acquitted.

After being selected without a proper tender, the new provider extracted an extra $1.1 billion from Australian taxpayers, which was agreed to without going back to the contractors who had just been sacked. The price per detainee shot up from $201,000 to $573,100.

Astonishingly, the report says the department didn't tell its minister at the time, Scott Morrison, that the deal required the Commonwealth to pay a "significant premium over and above the historical costs". Nor did it tell him the price per head.

The department was not only shielded from public accountability, it also managed to hide things from its minister.

UNICEF and Save the Children get the $9.2 billion figure in their report At What Cost? from the numbers scattered around various parts of the official record. They say there are less specific other costs they haven't included, among them regular independent and senate inquiries, the defence of High Court challenges, and compensation for detention centre employees who have suffered as a result of what they have been exposed to.

Intriguingly, the cost of boat turnbacks, the part of the government's policy that has probably been the most effective in deterring asylum seekers, is tiny by comparison: just $295 million over three years, compared with $9.2 billion for continuing to hold asylum seekers in detention.

And there's a whole other set of costs, which At What Cost wrongly labels non-economic, hidden from the public by gag clauses: self-harm, suicide attempts and mental deterioration, especially among children. Economists would say they destroy human capital. Adam Smith, the father of modern economics, titled his magnum opus An Inquiry into the Nature and Causes of the Wealth of Nations because he had discovered that that's what gave nations wealth – not gold or notes or coins, but human beings who could provide goods and services.

Deliberately or carelessly deprecating human capital is perhaps the worst crime against humanity. The Commonwealth Treasury thinks so. Chief among the goals in its wellbeing framework is giving people "substantive freedom to lead a life they have reason to value".

It has fallen to Malcolm Turnbull to end a system that has passed its use-by date. Even criminals aren't locked up indefinitely on the pretence that their cases are being "processed". The decision of Papua New Guinea to close the Manus Island detention centre makes a decision more urgent. On Friday he meets the president of the Human Rights Commission, Gillian Triggs, to discuss the way forward. She says we should move from deterrence to prevention. It would cost so much less.

In The Age and Sydney Morning Herald

Wednesday, September 14, 2016

Turnbull promised economic leadership. We're waiting

Unveiling his surprise strike against Tony Abbott a year ago, Malcolm Turnbull identified just one reason for rolling a sitting prime minister: "economic leadership".

"It is not the fault of individual ministers," he told a packed press conference in a Parliament House courtyard. "Ultimately, the Prime Minister has not been capable of providing the economic leadership our nation needs.

"We need a style of leadership that explains complex issues, sets out the course of action we believe we should take, and makes a case for it. We need advocacy, not slogans. We need to respect the intelligence of the Australian people."

Twelve months on it's easy enough to assess the economy. It's improved. The unemployment rate has slid from 6.1 to 5.7 per cent. The economic growth rate has climbed from 2.5 per cent to 3.3 per cent. We've got jobs and growth.

But as for leadership ("advocacy, not slogans") the jury's still out.

There's no doubt that Turnbull consults. Within weeks of taking office he gathered together in the Cabinet room 25 leading economic advocates who had spoken earlier at a Financial Review summit and went around the table asking each what they thought should be the highest priority. In a complete break with the Abbott era, the group included union and social service representatives. A month later amid debate over the best shape for superannuation tax concessions, he phoned Deloitte Access director Chris Richardson at home and asked him to walk him through the arguments.

Yet his actions after consulting widely have been timid. His much-vaunted innovation statement included nothing extraordinary. A Turnbull insider who was proud of the statement sold this as its chief virtue. It did little harm.

On tax, after seriously considering the case for a 15 per cent GST, Turnbull said "no" on the basis that treasury modelling found it would do next to nothing for economic growth and would require very big compensation payments. His treasurer Scott Morrison was slower to reach the conclusion, talking up the idea even as Turnbull killed it.

Turnbull and Morrison inherited a budget deficit set to hit $33.7 billion in 2016-17 then blew it out to $37 billion by boosting spending and cutting tax in a pre-election budget full of talk, but little action, about controlling spending.

Even their omnibus savings bill, due to finally go before Parliament on Wednesday, will save just $1.6 billion per year, about 0.4 per cent of budget spending. That cautious approach is the right one, but it's hard to reconcile with talk about budget repair.

Where they have been bold is in their approach to company tax and superannuation. Independent modelling conducted for Treasury finds the promised company tax cuts will eventually cost $8 billion per year. The Parliamentary Budget Office puts the figure at $14 billion. Neither Turnbull nor Morrison have said how they'll pay for them. They've placed a lot of faith in modelling that shows the tax cuts will boost growth, but none has them boosting it enough to become self funding.

The superannuation changes will make back just a fraction of what the company tax cuts will lose: $770 million per year. They too are based on Treasury advice and ought to be saleable if much of an attempt was made to sell them.

For all his talk about explaining complex issues and building a case, Turnbull has done it rarely – usually after rather than before making a decision. More often he hasn't needed to, because he has decided (perhaps wisely) to leave things as they are.

To a large extent the economy has been improving of its own accord as commodity prices rebound and the impact of the lower dollar settles in. Two Reserve Bank rate cuts have helped as well. Really bold decisions of the kind the Reserve Bank has been urging such as borrowing big for infrastructure, haven't yet been made. It's easy to get the feeling that we are not being taken into Turnbull's confidence as he promised.

But he hasn't been in office long, and a big chunk of the year was taken up with a marathon election campaign. He'd like us to think there's time. We're waiting.

In The Age and Sydney Morning Herald

Sunday, September 11, 2016

Why going cashless is the next moral challenge

What with myki cards, Opal cards, e-TAGs, epay, payWave, bitcoin and mobile phones, we're using less cash than ever, right? Not on your life.

The latest Reserve Bank figures show there were seven $5 notes per person in circulation in 2015, well up from five per person ten years earlier, and four,10 years before that.

(If those numbers seem small, but climbing, it's because the same notes get used over and over. They are a bit like extras in a movie.)

We have around six $20 notes per person, close to a record high, and far more $50 notes than we used to (25 per person) because of their use in automatic teller machines. But it's the use of $100 notes – the kind most of us hardly ever see, and the kind bank transfers should have rendered redundant – that is exploding.

Twenty years ago there were only five $100 notes per person in circulation. They were less common than $20 notes, which was appropriate given they were far less used. A decade later in 2005 after the introduction of the goods and services tax (the one we were told would kill the cash economy) we had seven per person, and now we have 12. A graph included in the latest Reserve Bank annual report shows the number of $100 notes in circulation climbing faster than any other denomination.

Note that I said "in circulation". They are certainly not in day-to-day use. A few years back I was asked on ABC radio what colour they were. I had to guess, and I guessed wrong. Whereas the lobster-red $20 notes are always in and out of our purses and wallets and last about 12 years before being damaged and returned to the Reserve Bank, the Bank expects the typical $100 note to last 70 years. When they do come back they are often not even unbundled.

Who's got them? According to The Curse of Cash released this week by influential US economist Kenneth Rogoff, they are mainly in the hands of drug lords, human traffickers and tax evaders. We are actually worse than the United States, according to Rogoff. Ninety-two per cent of our currency is in large denomination notes, compared to 84 per cent in the US. Only Switzerland, Israel, Norway and Russia use big notes more than we do.

Rogoff wants us to go "cashless", at least for denominations above $10, and eventually he would turn the $10 note into a coin to make it harder to move around undetected. Phasing out high denomination notes would be painless, for those of us with nothing to hide. We would be invited to deposit them in banks in return for their full value up until a deadline, after which they would no longer be legal tender and worthless.

Naturally, there's a catch. Our Reserve Bank, like the US Federal Reserve, makes money from issuing $100 notes. It's conflicted, being in effect a silent partner in organised crime.

In The Age and Sydney Morning Herald

Thursday, September 08, 2016

"Special bonds". The snaring of UTS, and Sam Dastyari

Sam Dastyari had been in the Senate mere months when a ghost from his past came back to haunt him. He was sued by a marketing company over work it said he had commissioned and then abandoned while general secretary of the NSW Labor Party.

He settled the case for around $5000, but rather than pay it himself or get the Labor Party to help, he sent the bill to the Yuhu Group, reporting its support in the register of senators' interests.

The Shenzhen Yuhu investment development group was founded by Huang Xiangmo, a Chinese-Australian billionaire to whom $5000 was literally small change.

A few months earlier he had given $1.8 million to the University of Technology in Sydney to help establish an Australia-China Relations Institute, which supplanted an existing China Research Centre whose publications had at times been critical of China.

It emails journalists offering all expenses paid trips to China ("flights, accommodation, meals and internal transport") and, in an unusual approach for a university body, describes itself as taking a "positive and optimistic view" of the Australia-China relationship.

Click the "research" button on its website and you won't see research, but "fact sheets" urging Australia to approve the Australia-China free trade agreement, not to run freedom of navigation exercises in the South China Sea and not to block the takeover bid for an electricity network.

Huang chairs the Institute himself, or so he says, in another departure from normal practice. He says he personally chose Australia's former foreign minister Bob Carr to run it.

John Fitzgerald, a China specialist who directs philanthropy studies at Swinburne University, says it is the clearest departure from accepted university practice he has seen. Other research centres, such as those part-funded by the United States, critically examine what's happening in the US. Another academic familiar with the Institute who teaches in China says there is more questioning of the Chinese regime among his own Chinese students than there is at the University of Technology, which seems to be the way Huang wants it. A prodigious donor to both sides of Australian politics, he wrote in a Chinese newspaper last week that donors needed to learn how to have, "a more efficient combination between political requests and political donations, and how to use the media to push our political requests".

Huang sees donations as transactional. But the transactions aren't always in Australia. In China, where some of his associates have been under a cloud, giving money to Australian universities and politicians is seen as a way to do the right thing by Chinese officials. China itself has set up "Confucius Institutes" at 10 Australian universities including the University of Melbourne with the aim of promoting "Chinese language and culture in a friendly, accessible and educational way". They are also in high schools, 35 of them according to the former education minister Christopher Pyne.

To the Chinese Communist Party they are "an important part of China's overseas propaganda set-up". To Australian schools desperate for funds, they are a way to get teaching resources cheaply.

The Communist Party itself has ultimate control over their curriculum, budget and hiring and training of staff, according to a Parliamentary Library research note, creating "extra-territoriality" within Australian universities and schools.

In Canada the Association of University Teachers has urged universities to sever their ties with Confucius Institutes. In the US, the Association of University Professors has issued a report suggesting their governance arrangements are "inconsistent with principles of academic freedom", and at Chicago University the university senate has voted against renewing the institute's contract after receiving a petition from 100 staff complaining that an outside entity was "in effect seriously influencing who's teaching and what's taught under our name".

But here we don't seem to care as much, perhaps because, like Sam Dastyari, we believe we can take money without being expected to give anything back in return. That isn't how it's seen in China, that's not how it's seen by donors such as Huang, and it's not what the research shows. Yes: there is economic research into our response to gifts.

Oddly, and disturbingly for recipients such as Dastyari, it finds that small gifts can pack a bigger punch than big ones. For their study entitled You Owe Me, Ulrike Malmendier and Klaus Schmidt allowed bidders to give gifts to students deciding which firms to award contracts to in a laboratory experiment. The games weren't repeated, so there was no chance of ever encountering the gift-givers again. Yet the small gifts won them over, even when what the bidders were offering was a worse service. As the size of the gift grew the effect faded.

They explain their findings by saying gifts "create a special bond between the gift giver and the receiver". The more obvious the attempt, the more our guard goes up. It's why doctors surgeries are filled with branded pens and free samples rather than wads of cash.

But there's a caveat. Experienced China watchers say the gift needs to be just big enough to create a slight feeling of unease. Once the recipient feels they might have transgressed, they're hooked for next time.

In The Age and Sydney Morning Herald

Saturday, September 03, 2016

Tax cuts next month. Commissioner buckles

Taxpayers earning more than $80,000 are set to get their promised tax cuts from October, but only after a backdown by the bureaucracy.

After the $6 per week tax cut was announced in the May budget, Tax Commissioner Chris Jordan defied Prime Minister Malcolm Turnbull who said it would be implemented "administratively" because the Parliament wouldn't be able to sit before it was due to start on July 1.

Mr Jordan told the Treasury and Finance departments that he wanted "the relevant legislation to be passed before the change will be incorporated into the income tax withholding schedules".

This meant that although high earners might eventually get a refund of up to $6 per week, tax would be deducted from their pay packets at the old rate until the legislation had been approved by both houses of Parliament.

The Australian Tax Office backed up its stance in an email to journalists which said it amended deductions once each year in June and only in accordance with "enacted law".

"If the personal income tax cut measure is legislated by the incoming government, the ATO will at that time consider the administrative approaches available to implement the new individual income tax rates that apply," the email said.

That remained the ATO position until Friday, when newspaper reports warned that high earners might have to wait until the end of the financial year to get the tax cuts promised from July 1.

Within hours Treasurer Scott Morrison announced that they would get them from October 1. Although the legislation hadn't been passed, it been introduced into the lower house, and that was good enough for the ATO.

Asked why it had backed down, the ATO said though a spokeswoman it had made a political judgement. 

Public statements provided "confidence that it is likely Parliament will pass the amendments". The new deduction schedule would be registered on Friday.

Asked whether the ATO had ever previously changed an income tax deduction schedule ahead of a change in the law, the spokeswoman said she would check.

In 2013 the ATO told Fairfax Media it could "only take dollars from people and give dollars to people if there is legislation in place for us to do it". 

For other kinds of tax the ATO does have the authority to change schedules ahead of legislation, a latitude that has at times caused problems.

In 2008 the it boosted the rate of tax on luxury cars after an announcement by the treasurer. When the increase was voted down it faced the prospect of handing the tax back to buyers and had to negotiate a compromise.

In 2009 it boosted the rate of tax on so-called alcopops by 70 per cent only to see that legislation voted down, raising the prospect of a refund to distillers. Again, it negotiated a compromise.

In The Age and Sydney Morning Herald

Friday, September 02, 2016

Capex. Investment outlook the worst since 2010-11

New investment intentions figures point to a shocking financial year ahead with mining investment down 22 per cent, manufacturing investment flat, and other investment down 16 per cent.

The Bureau of Statistics figures, collected from the chief financial officers of the major companies, are bleaker than the soundings of the Reserve Bank board which in its last minutes pointed to "signs that non-mining business investment was rising in some parts of the economy".

They are also much bleaker than those of the federal Treasury, which in the May budget forecast a drop in total investment of just 5 per cent in 2016-17.

The ABS figures point to an overall drop in investment of 17 per cent, from $127.5 billion in 2015-16 to just $105.2 billion in 2016-17. They would make 2016-17 the worst year for business investment since 2010-11.

As is traditional, the June quarter estimates for the financial year ahead were higher than the March and September quarter estimates.

Actual investment slipped 5.4 per cent in the three months to June, to be down 17.4 per cent over the year and down 29 per cent from the peak in December 2012. Mining investment slid 36 per cent over the year and 16 per cent over the quarter. Non-mining investment was flat over the year and up 2.1 per cent over the quarter.

Western Australia accounted for the bulk of the slide over the past year, investing just $8.6 billion in the June quarter of 2016, down from $13 billion a year before. Investment in NSW climbed from $7 billion to $7.6 billion. Investment in Victoria remained steady at $4.8 billion.

Commsec chief economist Craig James said the weak figures meant the Reserve Bank might well cut interest rates again, at its Melbourne Cup Day board meeting in November.

"The question is whether it will do any good," he said. "Certainly retailers believe that cuts have lost their potency."

The figures will weigh on the June quarter economic growth number due out next Wednesday with many analysts forecasting quarterly growth of just 0.3 per cent, down from an unusually high 1.1 per cent in the March quarter.

Separate Reserve Bank figures released on Thursday may lend support to investment. Its index of commodity prices climbed a further 1.5 per cent in August after climbing 3.9 per cent in July. It has been climbing since February.

In The Age and Sydney Morning Herald

Thursday, September 01, 2016

How the government rounded on Newstart

Most of the really bad decisions made by governments are mistakes, ones they are reluctant to admit. The decision to withdraw $4.40 a week from unemployed Australians is one of them.

No credible organisation thinks it should. The Business Council says Newstart is so low it "presents a barrier to employment and risks entrenching poverty". The Organisation for Economic Co-operation and Development says it raises issues about its effectiveness in "enabling someone to look for a suitable job".

Even the Coalition-dominated inquiry into Newstart found there was a "compelling case" for boosting it, but refrained from recommending it for budgetary reasons. But actually cutting the payment ... no one has ever suggested it, not until the Coalition tried it.

It had its first go within weeks of taking office in 2013. In its sights was the twice-yearly $105.80 "income support bonus" added to Newstart by Labor as part of its "Spreading the Benefits of Boom" package.

Worth around $5.40 a week to someone on unemployment benefits, it had to go because it was funded by the minerals resource rent tax which the Coalition had promised to abolish. The Palmer United Party, whose votes it needed, agreed on one condition: that it stayed until after the next election. The bonus is scheduled to vanish on September 20, the first date after the election that it would have been paid.

Having encountered surprisingly little resistance in its attack on the incomes of the lowest paid, in May the Coalition went back for more.

Newstart recipients, along with pensioners, Austudy and Abstudy recipients, those on carers' allowances and seniors health cards, family benefits, parenting payments and youth allowances also get a small "energy supplement". It used to be called the Clean Energy Supplement, because it was brought in to compensate for the introduction of the carbon tax. For a single Australian on unemployment benefits, it's worth $4.40 a week.

Along with the Energy Supplement, it's the only increase beyond inflation Newstart recipients have received in a generation.

The logic for removing it is that the government should "no longer compensate people for a tax that no longer exists", as Treasurer Scott Morrison said when introducing the legislation on Wednesday.

But it's logic he has proudly failed to apply to better-off Australians, who get to keep their compensation – delivered as tax cuts – and were given more in the May budget.

As he boasted back then: "When you get rid of a carbon tax and then you keep the tax relief, that turns from being compensation to a tax cut."

What he and his advisors may not have realised back then (they certainly didn't point it out) is that what seems like simply returning Newstart recipients to where they would have been had the supplement not been introduced, it in fact makes them worse off. It represents a real cut to the incomes of unemployed Australians, the first ever.

All that's needed to understand how is some maths.

Newstart is normally increased twice each year in line with inflation. The next increase on September 20 will be one of the lowest ever, just 0.18 per cent, because inflation has all but stalled.

But when the carbon tax came in, inflation jumped. Rather than increase the allowance in line with that jump, the government withheld 0.7 percentage points, because that was the amount it believed was due to the carbon tax, which was to be compensated for separately by the Clean Energy Supplement.

Removing the Clean Energy Supplement without putting back the 0.7 points that was lost leaves new entrants to Newstart worse off than if their benefits had never been fiddled with. The increases in energy prices that flowed from the carbon tax were real, as the Coalition never tired of telling us.

Estimates prepared for the Australian National University by social security analyst David Plunkett suggest that new entrants to Newstart will be $3.60 a week worse off than had the whole thing never happened, in addition to being $5.40 a week worse off from the removal of the Income Support Bonus.

Most won't notice. Morrison confirmed on Wednesday that existing recipients would continue to receive the supplement. Only the new ones would suffer.

The split comes at a cost of introducing still more unfairness. If it gets through we are about to have two classes of Newstart recipients, existing ones on very low incomes, getting around $13,720 plus $4.40 a week, and newer ones on even less, getting only $13,720.

Most members of parliament get more for spending nights away from home. To its great shame Labor was sucked in during the campaign, apparently not doing its maths either. It backed the removal of the supplement and booked the savings for itself should it take office.

But it knows about the maths now, and it may be prepared to admit its mistake. The government should too. It'd hardly be its first backdown, but it would be nice if it offered it first as a gesture of goodwill. It surely can't have intended to leave unemployed Australians worse off than they were 10 years ago, can it?

In The Age and Sydney Morning Herald